HOUSTON – Increased southbound pipeline and rail service has reduced a crude oil backup at the Cushing, Okla. pipeline hub, but has created a glut on the Gulf Coast—possibly presenting opportunities for investment in transportation infrastructure.
Alembic Global Advisors said in a report this week that the smoother flow through Cushing has sent more crude to the Gulf Coast from prolific fields including the Bakken Shale in North Dakota and Permian Basin in West Texas.
James Sullivan, an analyst with Alembic, wrote that a resulting oversupply is depressing Gulf Coast prices, and may increase enthusiasm for more investment in transportation from the Bakken and Permian directly to the east and west coast.
“We would expect to see the Bakken rail terminals to the east coast filling up again and renewed talk of a Permian-to-west-coast pipeline, which had been shelved due to lackluster shipper interest,” Sullivan wrote.
Talk of better infrastructure to both coasts comes as domestic oil prices have dropped 11 percent in the last three months, indicating that the market expects continuing oversupply of domestic crude. At the same time, East and West coast refineries still import more than 1.5 million barrels a day of crude from overseas, and about a third of this crude oil could be replaced or blended with the light crude produced by the unconventional plays.
U.S. benchmark West Texas Intermediate crude ended at $97.38 Thursday on the New York Mercantile Exchange, up 18 cents on the day but down from nearly $110 in early September. Brent crude, a benchmark for international oils, fell 90 cents to $110.98 in European trading Thursday — narrowing its premium over the domestic benchmark, but still providing opportunities for refineries on both coasts to benefit from the gap in prices.
Growing U.S. production in newly active areas that lack sufficient transportation infrastructure has boosted supplies and put downward pressure on the price of oil in Cushing, the historical trading hub for U.S. oil. But the glut on the Gulf Coast is a relatively new phenomenon, and has for the first time pushed the price of Louisiana crude to trade at a $10 discount to its price in Cushing.
It’s prompting suppliers to move domestic oil to the nation’s other two coasts, but transportation limitations — even with the additional options out of Cushing — have made it difficult to drain the growing supply, Sullivan said.
West Coast refineries import about 100,000 barrels a day of light, sweet crude — the same grade produced in unconventional domestic plays. That suggests opportunities for replacing those imports with oil from the domestic oversupply. But because many west coast refineries are designed to process high- and medium sulfur (sour) crudes produced in California and the Alaska North Slope crude, greater use of light, sweet oil would require blending it with heavier crudes.
Shipping oil overseas to compete with pricier Brent isn’t an option because U.S. law dating to earlier periods of oil shortage prohibits most crude exports. That ban is coming under fire from some producers.
While Sullivan didn’t call for lifting it, he did speculate that some of the oil supply now accumulating on the Gulf Coast could be blended with heavier crude and replace Alaskan crude. Alaska’s oil is exempt from the export ban, so it then could be shipped overseas.